Exchange rate undervaluation and

sectoral performance of the South

African economy

Citation: Bernard NjindanIyke, "Exchange rate undervaluation and

sectoral performance of the South African economy", Journal of Economic

Studies, https://doi.org/10.1108/JES-03-2016-0052

Prepared by: Hammad ur Rab

Introduction
Most theoretical and empirical studies show, exchange rate
misalignment can seriously impact the growth prospects of an
economy.

Some cross-country studies have emphasized the need to avoid

overvalued currencies.

Empirical evidence showing that many Eastern Asian countries,

notably, Japan, South Korea, Taiwan, Hong Kong, Singapore and
China, have deliberately undervalued their currencies in order to
benefit their economic performance
Measure of real exchange rate
undervaluation

• Rand-dollar exchange rate (), and the consumer price indexes

for South Africa () and the US ( ∗) from the World Bank’s World
Development Indicators (WDI) database

• when RER is increasing, the Rand is depreciating relative to

the dollar in real terms
 Measure of real exchange rate
undervaluation
• RER suffers from a distortion by the Balassa-Samuelson
• Bhagwati effect, which states that nontraded goods are cheaper
in developing countries than in developed countries (see Balassa,
1964; Samuelson, 1964; and Bhagwati, 1984),

• Real per capita GDP of South Africa divided by real per capita GDP
of the US at time period , is the natural logarithm, and is the
error term at time
 RER index
• we estimate using the quantile regression technique
• final step in constructing the real exchange rate undervaluation
index, we establish the difference between the
• Actual real exchange in and the adjusted Balassa-Samuelson-
Bhagwati rate
Sectoral Performance
• It was ssumed that all sectors are influenced by the same kind
of factors.

• Control variables were include

• physical capital,
• human capital,
• population growth,
• inflation rate,
• real interest rate,
• terms of trade,
• trade openness, and
• bank credit provision to the private sector
Data and Estimation Techniques
• Annual and cover the period 1962-2014.
• Data on human capital (HC)8 and terms of trade (TOT) are
taken from the Penn World Tables version 7.1 compiled by
Heston et al. (2012).
• TOT is calculated as the price of exports divided by the price of
imports.
• Data on commodity prices (RCP) are sourced from GEM
Commodities (2015).
• Physical capital (K) measured
• Gross capital formation as a percentage of GDP), population
growth (POP), the inflation rate (INF), trade openness (OPEN),
government consumption expenditure as a percentage of GDP.
Data and estimation techniques

• Data on private credit extension by monetary banks and other

financial institutions as a percentage of GDP interest rate (RIR)
are extracted from the World Development Indicators (WDI,
2015
• Performance of the agricultural, industrial and service
sectors as their value added, as a percentage of GDP

• OLS estimator (with Newey-West and robust standard

errors11) and
• the generalized method of moments (GMM) estimator
Results & conclusion
exchange rate undervaluation positively and significantly affects
agricultural sector performance.

Coefficient of the real exchange rate undervaluation term

appears positive and significant at the conventional levels of
significance for industrial sector.

The impact of real exchange rate undervaluation on growth in

the service sector is negative and significant, although weak